Housing Market: Robert Shiller Still Wary

When Robert Shiller, Yale economist and co-creator of the revered S&P Case-Shiller index speaks, the real estate world listens.
The last time the Case-Shiller housing price index came out, 12 of the 20 U.S. cities tracked showed decelerations -- meaning prices in those cities have been flat for more than a year. With the first-time homebuyer'scredit in our rear-view mirror, Shiller says that he is worried the housing market could see a downturn in prices because no one knows what new stresses lie ahead, especially with newcomers in Washington.

"The homebuyer credit did create an end to declining home prices, but it didn't create a strong enough recovery," Shiller told GuruFocus.

Then there's hedge fund titan John Paulson, who thinks everyone ought to be out there buying homes and gearing up for housing inflation. The man who made billions betting against the sub-prime mortgage market said just this summer that we are in the midst of a sustained recovery, with a less than 10 percent risk of a double-dip recession.

Shiller versus Paulson: Whom to believe?
Shiller says Paulson is making a risky bet, which is right up the billionaire's alley. But Shiller is not quite so bullish on the market. Paulson used California as an example of the market taking a positive turn. Yes, says Shiller, there was

a small market "echo bubble" that hit San Francisco. But the gross domestic product (GDP) from the last two quarters has been declining, said Shiller, which could suggest another recession on the horizon. A whole new team is coming into Washington. And there are limits to the monetary stimulus.

"You can't push on a string," said Shiller, meaning that borrowing rates are virtually at zero percent, but consumers still aren't budging.

This is what they called the "liquidity trap" in the Great Depression, he said.

So Paulson and other hedge fund types who urge buying up land and real estate are gambling, said Shiller. Of course, they can afford to.

In Shiller's view the housing economy is still too wobbly, too susceptible to stress. First we had the Greek Crisis, then Foreclosure-Gate. All we need is one more stress --- like new revelations of banking errors --- to send home prices down another 5 percent. That will, he says, put a lot of stress on financial institutions.